U.S. Senate Committee on Environment & Public Works
Hearing Statements

Date: 03/25/2004

Statement of Senator Voinovich
Environmental impacts of U.S. natural gas production

Mr. Chairman, thank you for calling this hearing on the environmental impacts of U.S. natural gas supply. High natural gas prices present a serious challenge for our nation. The natural gas crisis that has plagued this nation for the last 46 months has caused the hemorrhaging of many jobs and the bleeding will not stop until people start taking notice of the situation and we start doing something about it. It has also severely impacted the way of life for millions of Americans who struggle each day to pay their utility costs.

The fact of the matter is that people just don’t seem to understand the severity of the situation. Federal Reserve Chairman Alan Greenspan testified for Congress several times last year on this matter and stated: “I’m quite surprised at how little attention the natural gas problem has been getting, because it is a very serious problem.”

Unfortunately, it is a very serious problem that the people and businesses in my state of Ohio know all too well. Mr. Dennis Bailey from PPG Industries, which is a global manufacturer, will testify today on the effect natural gas prices are having on the company’s operations in Ohio and throughout the country. I thank him for coming and look forward to hearing his testimony. I also thank another Ohio manufacturer – Martin Kelly with Moraine Molded Plastics Inc. – for submitting testimony on this important matter and ask that it be inserted into the record.

As I have explained many times before this Committee, manufacturing is a key ingredient of our nation’s economy and is the backbone of Ohio. Manufacturers rely on natural gas heavily for fuel and power and as a raw material. In fact, natural gas accounts for more than 40 percent of commercial energy consumption. Additionally, natural gas plays an important role in another significant part of our nation’s and Ohio’s economy – agribusiness.

This reliance on natural gas by the core of our economy means that increases in natural gas prices have a very pronounced and negative effect. Since 2000, natural gas has been hovering in the U.S. between $5 and $6 per thousand cubic feet. This is roughly twice its historical level!

During this time, Ohio has lost about 200,000 manufacturing jobs. These jobs are not simply migrating to another region – they are going overseas and they aren’t coming back. This is because other countries do not have the high costs that we place on our industry, such as rising health care costs, litigation, regulatory burdens, taxes, unfair competition from China, and escalating natural gas costs.

The natural gas prices in the United States are the highest in the developed world. As a result, many companies are becoming less competitive on a global scale and are being forced to cut costs or move operations overseas. There are numerous examples of this and I will name a few.

Just last week, on March 17, the Washington Post ran an article entitled: “Chemical Industry in Crisis; Natural Gas Prices are up, Factories are closing, and Jobs are Vanishing.” I will read a few lines but ask that the entire article be submitted into the record:

“Across the country, 1 in every 10 chemical-related jobs has vanished in the past five years – nearly 100,000 workers…The chemical industry’s eight-decade run as a major exporter has ended, with a $19 billion trade surplus in 1997 becoming a $9.6 billion deficit last year…”

That is horrifying. The chemical industry is the second largest consumer of natural gas, and they simply cannot pass these higher costs on to consumers because they compete in a world marketplace. Instead, they pick up and move overseas.

Zaclon, Inc. is a chemical manufacturer based in Cleveland, Ohio. Last year, Zaclon’s president testified before this Committee that its natural gas costs increased 63 percent between 1999 and 2002.

Lubrizol Corp., a chemical company located in Wickliffe, Ohio that employed 1,778 people in 1999 and now employs 1,522, has indicated that they may consider moving operations overseas because of natural gas price volatility.

Due to high natural gas prices, the Dow Chemical Company, which is headquartered in Midland, MI, is shutting down several plants and will eliminate 3 to 4,000 jobs.

High natural gas prices have resulted in the permanent closure of almost 20 percent of the U.S. nitrogen fertilizer production capacity and the idling of an additional 25 percent. The Potash Corporation, one of the world’s largest fertilizer producers who spends $2 million per day on natural gas, has announced layoffs at its Louisiana and Tennessee plants due to high natural gas prices.

According to a February 17, 2004 Wall Street Journal article entitled “Natural Gas Costs Hurt U.S. Firms”, which I also ask be entered into the record:

“Almost all new production of chemicals and plastics will take place in the Middle East and Asia…Charles O. Holliday Jr., chairman and chief executive of DuPont Co., told investors in December that high energy costs will prompt the company to shift its ‘center of gravity’ overseas.”

Although these businesses are all severely impacted, this only tells part of the story. The natural gas crisis has cost all consumers – residential, commercial, and manufacturing – over $130 billion over the past 46 months and this is only direct costs. So while high prices are causing people to lose their jobs, it is also increasing the costs of simply living. It is estimated that increased natural gas prices in 2004 will cost Ohio households $543 million more than in 2002.

Home heating prices are up dramatically – forcing folks on low and fixed incomes to choose between heating their homes and paying for other necessities such as food or medicine.

Donald Mason, a commissioner on the Ohio Public Utilities Commission testified last year that:

“In real terms, the home heating cost this winter will increase by at least $220 per household. That might not sound significant, but during the winter season of 2000-2001, one gas company in Ohio saw residential nonpayment jump from $10 million a year to $26 million.”

I could go on and on about the devastating impacts of high natural gas prices, but I will now move on to the very important question for today’s hearing – WHY? Why are natural gas prices so high in this country?

The answer is pretty simple and anyone who has taken Economics 101 will understand. Over the last decade, use of natural gas has risen, while domestic supplies have fallen. The reason for these trends lies in our environmental policies.

In regards to supply, we have greatly restricted our ability to explore and produce natural gas because of the barriers enacted in our environmental laws. We must enact an energy policy that knocks down some of these barriers and opens up some of our public lands and new frontier areas to development. As I have done often over the past few years, I implore my colleagues to move past their partisan bickering and enact an energy policy for the good of this country.

In regards to demand, Congress has enacted environmental policies over the past few decades that have encouraged increased use of natural gas for electricity generation. In fact, nearly 88 percent of the new power plants that have been built since 1992 are natural gas fired. We must harmonize our energy and environmental policies to make sure that we maintain a diverse fuel mix for electricity generation and do not further exacerbate the natural gas problem.

If we do not take action today, the result will be overwhelming to our nation’s economy. [CHART 1] As you can see from this chart, the Energy Information Administration (EIA) predicts that natural gas use will continue to increase across all sectors, especially for electricity generators.

Regrettably, some of my colleagues – many of them on this Committee – have offered legislative proposals that would further increase the use of natural gas for electricity generation and cause more fuel switching from coal to natural gas by placing a cap on carbon dioxide emissions. These proposals would put coal out of business although it is our most plentiful energy source and the least costly. We simply cannot and should not place a cap on carbon dioxide emissions.

[CHART 2] This second chart shows what will happen if we don’t enact an energy policy and start increasing our supply of natural gas. The top line shows EIA’s prediction that natural gas consumption will continue to increase. My concern is that this consumption won’t increase because all of the jobs will be in other countries.

The bottom line is the predicted production from North America (U.S., Canada, and Mexico). EIA predicts that the shortfall between consumption and production will be met by a substantial increase in Liquid Natural Gas (LNG) imports (from Trinidad and Tobago, Qatar, Algeria, Nigeria, Oman, Australia, Indonesia, and the United Arab Emirates).

EIA predicts that LNG, which only accounts for 1 percent of current U.S. natural gas supply, will have to increase to 8 percent by 2010 and 15 percent by 2025 to meet demand. If this is the case, we will soon be talking not only about our country’s dependence on foreign oil but also foreign natural gas. Further, there have been recent reports that LNG facilities are receiving stiff resistance from communities on both coasts from Maine to California.

In conclusion, I think it is important to note that rising energy prices have preceded every economic downturn during the post-World War II period. I know firsthand that it has been a significant factor in Ohio’s current economic situation. Unless we stop artificially increasing demand and decreasing supply for natural gas through irresponsible environmental policies, our nation will only continue to lose jobs.

The past 46 months have been a trying time for businesses and families alike, and we must act now to harmonize our energy, environment, and economic needs by passing the energy bill and enacting common sense environmental laws.

Mr. Chairman, I again thank you for calling this hearing, and I look forward to hearing from our witnesses.

Thank you.

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THE WASHINGTON POST March 17, 2004 By: Greg Schneider, Washington

Chemical Industry in Crisis Natural Gas Prices Are Up, Factories Are Closing, And Jobs Are Vanishing

Soon after the Flexsys chemical plant celebrates its 75th anniversary this month, demolition crews will tear it down.

"Nothing over three inches high is going to be left here," plant manager Jon McKinney said.

The former explosives factory gave the town its name, and its demise will eliminate 205 jobs and yet another piece of the once-powerful U.S. chemical industry.

Chemicals are an unglamorous part of the manufacturing world, with products that have unpronounceable names and often hazardous qualities. But they are essential to a host of industries, from automaking to textiles to agriculture. Hardeners make tires more durable. Polymers put the spring in athletic shoes, and nitrogen fertilizers increase crop yields.

As the nation's manufacturing base seems to shrink daily from factories closing or relocating overseas, the health of the chemical sector is a crucial measure of how deep the problem goes. And chemicals are in crisis, squeezed not only by cheap foreign competition but also by soaring energy costs.

Across the country, 1 in every 10 chemical-related jobs has vanished in the past five years -- nearly 100,000 workers -- and that number would be worse if not for a surge in one segment, pharmaceuticals.

The chemical industry's eight-decade run as a major exporter has ended, with a $19 billion trade surplus in 1997 becoming a $9.6 billion deficit last year, according to the American Chemistry Council.

Governors and chemical executives have appealed to the White House and Congress for help. They argue that the chemical problem is making the nation's broader manufacturing meltdown even worse, pushing factories to relocate offshore not only for cheap labor but to be near chemical suppliers.

"It's a very trying time in the nation's manufacturing base," said Mark Zandi, chief economist for Economy.com Inc. Ultimately, little can be done to stop the drain of jobs as companies cut costs and use technology to improve productivity, he said.

"Workers in the chemical industry are really getting hit hard, much harder than the companies themselves," Zandi said.

The Flexsys plant in Nitro is closing because a sister plant in Belgium costs less to operate. In nearby South Charleston, Union Carbide Corp. has cut its workforce in half, to about 1,200 people, in the past three years. Bayer AG is shutting one of its two Charleston-area plants.

It's the same story in other chemical-heavy regions of the country, such as the Gulf Coast.

"Right now we've got big operations just shutting down because they cannot compete on the world market," Louisiana Gov. Kathleen Babineaux Blanco (D) said in a telephone interview. "We've had shutdowns before but they've always been temporary. We've not seen anything like this before."

Troubles began over a decade ago with the fall of communism, when countries of the former Soviet Union -- as well as China -- discovered they could compete in the world market for chemical products. Cheap labor and a freewheeling attitude toward safety and the environment helped them keep prices low.

As the global economy slowed, industries that consume chemical products came to depend on those lower prices to offset declining sales and profits. U.S. chemical makers struggled to cut costs and keep up. Then, around 2000, an unexpected problem hit: Natural gas prices went up.

Chemical plants are especially sensitive to natural gas prices because they use it both as a fuel and as a "feedstock" or ingredient in making plastics, resins, fertilizers and more. In the past five years, U.S. natural gas prices have roughly doubled as more and more electrical plants consume the clean-burning fuel but supplies stay stagnant. Other parts of the world -- including Western Europe -- pay far less.

"We have the highest natural gas prices in the industrialized world," said R. William Jewell, vice president for energy for Dow Chemical Co. in Houston. In the past two years, Dow has closed four major chemical factories in North America -- one in Louisiana, two in Texas and one in Alberta, Canada -- and replaced them with production from Germany, the Netherlands, Kuwait, Malaysia and Argentina, he said.

"These jobs didn't leave the U.S. because of labor costs, they left the U.S. because of uncompetitive energy costs," Jewell said. "It's very hard to have vitality in manufacturing and it's very hard to have strong growth in jobs if you don't have a competitive infrastructure anymore. . . . You can't just wish these jobs back."

Chemical jobs tend to be so well-paying -- in the $50,000 to $70,000 range -- that they're virtually impossible to replace in the communities that lose them, said David E. Dismukes of the Center for Energy Studies at Louisiana State University. Every time a factory cuts back or shuts down, the impact ripples out through the suppliers, restaurants and car dealerships that surround it.

"For a small state like Louisiana that is so dependent on those facilities, this really is a tough one for us," Dismukes said. "When they go away it has a devastating impact on small rural communities up and down the river where many of these are located."

The problem is similar to the death of steel mill towns in the Midwest and Pennsylvania in the 1970s and '80s, said Michael Hicks of the Center for Business and Economic Research at Marshall University in Huntington, W.Va. In 24 months, from January 2001 to December 2002, West Virginia's chemical workforce declined nearly 17 percent, to 12,000 people, Hicks said.

"It's a story that West Virginia has continued to feel for well over two decades now, with the decline in coal mining and steel production now followed by these challenges to the chemical industry," he said.

Even plants that stay in operation are providing fewer jobs.

For example, Bayer Polymers LLC operates a plant on an island in the Kanawha River in South Charleston. Barges bring long cylindrical tanks of liquid propylene oxide to a pumping station on the north shore. The material flows under the river to a maze of pipes, valves and vats on the island -- nearly a mile long -- where it goes through chemical reactions to become a polymer used in foam cushions for car seats, mattresses or athletic shoes.

The entire facility is operated by two people sitting in a control room watching computer monitors, aided by a team of eight technicians that handles repairs and maintenance.

In less than four years Bayer has increased the plant's output by 20 percent without adding any employees. The plant also has cut energy consumption by 9 percent since last year. Nonetheless, its costs are up 25 percent over the past five years, said site manager Glenn Kraynie.

It's a dangerous cycle. Rising costs cut into profit and make it harder to continue investing in improvements, which in turn makes it harder to compete with ever more efficient overseas rivals, said Attila Molnar, president and chief executive of Bayer Corp., the German company's U.S. arm.

"It is a very, very serious issue," Molnar said. "You shift manufacturing or production [to] where you produce the cheapest. . . . Production in the U.S. is in danger today."

There are at least two basic solutions, Molnar said. Do something about energy prices, such as burning more coal or drilling for more natural gas, and use technology to continue to make chemical factories more efficient. That means producing more with fewer employees.

"There's nothing there that says the jobs you have today will be the same jobs we have 10 years from now. That cannot be," he said. "Be prepared for change. That's the only way we can survive, the only way I can see we will be successful in the future."

That's a hard prescription for towns like Nitro, population 6,824, which stands to lose a chemical plant that once employed 900 people. The 202-acre riverfront facility started as a World War I explosives plant for making nitrocellulose, and the town was built to support it. Monsanto Co. bought the site in 1929 and has been making rubber additives ever since, today in a joint venture with Akzo Nobel NV called Flexsys. But with worldwide prices for its products down 42 percent, the company decided last fall to shut Nitro's factory down at the end of this month.

"I'm 45 years old and I've lived in this Kanawha Valley my whole life," said Dave Hardy, a lawyer and Kanawha County commissioner representing both Nitro and Charleston. "This valley was built on the chemical industry, and now in my adult lifetime . . . the chemical industry is contracting literally year by year. There is nothing that is filling the void."

Instead, the state is promoting tourism and gambling, he said. But West Virginia hasn't given up on the industry. Its statewide Chemical Industry Committee, a trade association, has been working to attract companies by touting the state's long embrace of an industry scorned in some places as environmentally undesirable.

It doesn't help the cause, though, that the committee's chairman is McKinney, the Flexsys manager, whose own company couldn't afford to stay in business there.

THE WALL STREET JOURNAL February 17, 2004 By: Russell Gold

Natural-Gas Costs Hurt U.S. Firms High Prices Are Prompting Companies to Conserve And Move Work Overseas

High natural-gas prices in the U.S. are taking an increasing toll on a range of companies, forcing them to change how they operate and even to shift work to parts of the world where energy prices are lower.

Some companies are updating or retuning older equipment and fixing minor leaks they used to ignore. Others are switching packing materials or looking to overseas sources for plastic wraps, fertilizer and other basic goods that are made from natural gas -- moves that ultimately will mean the loss of U.S. jobs.

For manufacturers already dealing with rising health-care costs for their workers, high natural-gas prices mean another unavoidable cost that can't be passed on to customers. Much of what these companies produce vies for customers in a global market with many lower-cost overseas rivals. The squeeze between cost and pricing pressures means less money for capital investment and for hiring new workers -- and potentially a drag on economic recovery. Higher natural-gas prices also undermine U.S. efforts to reduce the nation's dependence on overseas sources of energy.

Manufacturing companies say they realize they can't ignore the problem any longer. "The high spikes we saw in natural-gas prices were a wake-up call to management," says Jim Pease, corporate energy manager for Unilever, the Anglo-Dutch food company that has increased its spending on energy-efficiency measures since 2001. "The old days of stable, cheap energy prices are over."

After decades of being cheap and plentiful, U.S. natural-gas prices left the range of $2 to $3 per million British thermal units of the latter 1990s and hit two sharp spikes in the past four years before settling in to an average weekly spot price above $4 per million BTUs, where they have remained for an unprecedented 15-month run. U.S. natural gas is the most expensive in the industrialized world, averaging $5.50 per million BTUs for the past year.

At Amazon.com Inc. of Seattle, higher natural-gas prices have raised the price of air pillows used to buffer its products while in transit. Last year, air pillows made up 40% of the packaging cost of each Amazon box, up from 30% a year earlier. The plastic pillow that contains the air is made from natural gas.

The Internet retailer said it is considering using fewer air pillows or turning to more wraparound cardboard boxes, which it dubs "ravioli" wrap. Customers prefer the air pillows, but the rapidly inflating cost "affects our ability to keep prices low," says spokesman Chris Bruzzo.

The root of higher natural-gas prices is a federal policy that promotes use of the relatively cleaner-burning fuel without providing incentives or means for natural-gas companies to increase production. So while demand soared in recent years, especially from a raft of new gas-fired power plants, producers have struggled with supply. Most North American gas fields are years past their prime, and environmental restrictions prevent drilling on many of the most promising areas.

The chemical industry, which uses natural gas as a fuel and as a raw material, has been hit hardest. The rising cost of U.S. natural gas began battering these manufacturers at the same time the weak economy was damping demand for commodity chemicals and foreign producers were increasing their share of the U.S. market for chemical-based products such as plastic shopping bags.

U.S. chemical makers have lost an estimated 78,000 jobs since natural-gas prices began to rise in 2000. Louisiana, a hub of chemical production, lost 4,400 chemical-related jobs over the same span, or about 15% of that work force.

Almost all new production of chemicals and plastics will take place in the Middle East and Asia, where natural gas is more plentiful, producers say. Charles O. Holliday Jr., chairman and chief executive of DuPont Co., told investors in December that high energy costs will prompt the company to shift its "center of gravity" overseas.

Last month, Mr. Holliday joined top executives of Dow Chemical Co., Eastman Chemical Co., Rohm & Haas Co. and others in a letter asking President Bush and congressional leaders to lower royalties on some gas production, to allow more drilling in the U.S. and to reduce the incentives that promote the use of natural gas for electricity generation. If nothing is done, they warned, "investments and jobs will increasingly go to Asia and the Middle East."

Owens Corning, which ran ads in the 1970s urging customers to buy its pink insulation to cut their dependence on foreign oil, now finds itself scrambling to find new ways to cut its dependence on pricey U.S. gas. The company is operating under bankruptcy-law protection while it works out its asbestos liabilities, and high natural-gas prices are squeezing its margins and eroding profits.

"It's still our energy source of choice, but the big issue is the economics of natural gas in the U.S. relative to the rest of the world," said Mike Thaman, chairman and chief financial officer.

The company has begun to import more materials from overseas. Last fall, Owens Corning moved a top executive to Shanghai to find cheaper sources of polypropylene bags used to package rolls of insulation. By the end of this year, the company expects to import as much as half of its packaging material, lowering costs by 20% to 25%. In the past, all packaging material came from North American producers.

In a couple of years, the company expects 30% of its nearly $1 billion a year in purchases of minerals, chemicals and packaging to come from outside North America, up from 10% today, company officials say.

Last year, the Toledo, Ohio, company also began to experiment with an insulation factory in Waxahachie, Texas, that was burning as much as $4 million to $5 million in natural gas a year.

The company installed four meters on each of the three enormous production lines to measure natural-gas usage by the minute. Consultants figured out settings for the incinerators and melters that would cut usage without sacrificing product quality. With adjustments, natural-gas use in the third quarter of 2003 was 18% below the year before, even though production has increased. The plant is now approaching $1 million in annual energy savings.

Even the smallest adjustments matter. One day last summer, Gary Chastain, the plant's energy guru, saw that the steam boilers overnight had begun using more than double the normal level of gas. He dispatched maintenance workers, who searched for nearly two months to find the culprit: a leaking valve that was costing Owens Corning about $460 a day.

The Waxahachie experiment has been so successful that the changes will be replicated in 10 other North American insulation factories and two composite-fiber factories by the end of this year.